What is a Life Estate and When Will I Need One?
There are many types of property rights and many forms of property ownership that differ from the common and familiar “fee simple” ownership or joint ownership structures. One form of ownership can provide a way to avoid probate, save on some taxes, and still provide you with a home for as long as you live. It’s called a life estate.
A life estate is a form of joint ownership in a piece of real estate. The hallmark of a life estate is the length of time each owner has rights in the property and what those rights are.
Life Estate is Joint Ownership but with Different Rights
The person who holds the life estate, called the life tenant, has possession of the property during his or her lifetime. Upon the life tenant’s passing, the other owner, called the remainderman, will take full ownership of the property, and can take possession if she desires. In other words, the remainderman owns the property but has no right to possess it as long as the life tenant is alive unless the life tenant gives express permission.
After he passes away, the life tenant no longer has a say in how the property is treated or what the remainderman can do with it, even if the life tenant attempts to restrict use or ownership through other means or through a will.
Here are some features of a life estate and whether those features are helpful or could cause problems down the road.
Life Tenant’s Responsibilities
During his lifetime, the life tenant generally is responsible for maintaining the property. He can also improve it, and often has the right to rent it out.
No Probate Necessary
When you want to avoid putting the property through probate, a life estate could be a simple solution. When using a life estate deed, the property passes automatically to the remainderman upon the death of the life tenant. No need to use the probate court to effectuate a transfer. In this way, it’s similar to joint tenancy with right of survivorship.
Setting up a life estate is generally easier and less expensive than setting up a living trust. In Texas, Michigan, and Florida, employing an "enhanced" life estate deed can afford even more rights and protections.
Life Estates and Medicaid
Medicaid, being a safety net entitlement program, has strict rules governing how much you can own and still take advantage of the program. For many older folks, Medicaid is a lifeline when they need to move into a nursing facility. Most people don’t have the ready cash that it takes to move into a nursing facility, which can cost well over $5,000 a month. But owning a home or keeping the proceeds from the sale of a home, is usually enough to either disqualify you from Medicaid eligibility or subject the property to Medicaid liens that would allow Medicaid to recoup some or all of the benefits it provided you.
If, however, you transferred the property to a trusted friend or relative and retain a life estate at least five years before you apply for Medicaid, the house will not counting against your assets in assessing your eligibility.
There is an exception. Under certain circumstances, if you purchase the life estate for a fair price and live on the property for a year, you may still be eligible for Medicaid benefits.
When To Consider a Life Estate
- When you want to transfer the property but retain access during your lifetime.
- When you want to some measure of certainty as to who gets the property after you pass on.
- When you want a less expensive alternative to a living trust.
- When you think you may need to use Medicaid to go into a nursing home, and you want to avoid Medicaid liens on the property.
- When you want the property to qualify for reduced homestead and senior tax exemptions.
- When your heirs can receive beneficial tax treatment.
Possible Downsides to Consider
Even though a life estate can solve lots of issues, there can be downsides worth considering before you jump in.
- When you own a life estate in the property, before you can sell it or use it as collateral, you must have the permission of the remainderman, and in most states, the spouse of the remainderman.
- You may also be limited in the type of financing you can get on the property.
- You cannot reverse the life estate deed just because you may have changed your mind. You must have the cooperation of the remainderman.
- The creditors of your heirs may be able to place a lien against the property, but they can’t force you to give up your life tenant rights. If you sell the property, you may have to pay off that lien.
- You may also find that the life estate affords you few protections if your heirs file for bankruptcy or go through a divorce.
- If the remainderman predeceases you, his heirs will become the remaindermen. So, you may want to make sure you know who you may be dealing with for the remainder of your life estate term.